Debt can be a useful tool, but other times you can get stuck in the debt trap. Sometimes debt keeps you in a continuous cycle where interest compounds and it seems like you'll never escape. So what are some of the ways that debt traps you?
1. Interest isn't your friend
Interest is a parasite that you can't get rid of. When you take out a loan or have an open credit card, you can keep paying the interest off, but it'll keep coming back until you pay off the entire debt. The buildup of interest over time and the difficulty of paying it back leave you in the debt trap.
2. If you can't pay, you're punished
Whenever a person can't make payments on a loan, nothing good happens. Their credit can take a huge hit due to a missed payment and their interest will compound. If you lose your job, the loan company doesn't care and just wants their money back. They don't help you get out of your slump and just make it worse by piling on interest. This practice keeps you stuck in the debt trap.
3. You always pay more than you bought the item for
The use of interest forces you to pay more on an item than you initially paid for it. Sure, that's the point of interest, but that doesn't mean that it's not a trap. It means the item will never be worth what you paid for it. In some cases, you can even pay up to three times what you paid for an item or more. In the long run, you pay more for an item than a person who pays for the item outright, leaving you with a lot less money for the future.
4. ...Unless you declare bankruptcy
The only way to avoid paying back everything when you're in debt, is to declare bankruptcy, which can cause more problems than they fix. Declaring bankruptcy will hurt your credit and stay on your record for 7 years. During that time, it would be hard to get financing from almost anyone without a subprime loan, the ultimate debt trap.
What alternatives are there to the debt trap?
There are currently few options out there for people trying to avoid debt when financing. One current option for students or recent graduates is the use of Income Share Agreements. This financing method is debt free and offers many protections for the income sharer. Defynance currently offers an Income Share Agreement for recent college graduates trying to rid themselves of their student debt.
